Ugh, management is trying to determine whether or not we can put an interest rate floor on existing HELOCs.

I am in the process of reviewing our current loan docs, but I wanted to check the awesome brains in here to see if they knew of any compliance issues related to this proposal.

Appreciate any and all help.

If you didn't contract for it then you can't impose it.

And no you can't do a change in term notice. Imposing a floor would not be a benefit to the borrower. You could only change the terms if the borrower expressly agrees to it in writing.

You also would have no grounds to suspend the account simply because they would not agree to the change in terms.

Thanks Dan. I found the following question and answer during further searching. You guys rock! Thanks.

Question: With interest rates continuing to decline, is it permissible to give a 30 day notice to current HELOC customers and place a floor rate?

Answer: After reading Section 226.5b(f) of Regulation Z, you will discover that creditors may NOT initiate unilateral ANY unfavorable change to HELOCs. In spite of the fact that other types of open end credit accounts can be administered this way, the HELOC is subject to much tougher rules.

Notice, however, that the prohibition only addresses unilateral changes. With the customer's agreement, you can modify anything. Although customers may not accept a floor with nothing in return, you might interest them in both a floor and a generously low ceiling. It's important to note that mutually agreeable modifications must be negotiated with each customer - you still can't impose changes across the board.

I have a related question or two (maybe more, we'll see where this goes) regarding the floor on a HELOC.

My bank wants to start imposing a floor on HELOCs. We have one situation where the disclosures have already been given, but no funds have been disbursed. The mortgage department wants to put a floor in place on this particular loan and then all from this point forward. I told mortgage that the floor could not be imposed unilaterally (there would have to be an agreement between the bank and the borrower to impose the floor). I advised against doing anything with a floor on this loan.

Here are my questions:

Did I do the right thing? (In other words, is there any prohibition on doing new disclosures that would include the floor?)

Does the floor provision need to appear in the note?

Does the floor provision need to appear in our disclosure?

I would appreciate it if one of you knowledgeable folks could answer my questions. Thanks in advance.

1. Yes you did the right thing. You can't change your plan disclosure midstream in the application process, or if you do then the applicant can cancel the request and ANY fees you've collected (including third party fees such as appraisal fees) have to be refunded.

2. Yes, it's a contractual issue. If you don't contract for it you can't impose it.

3. Yes, and it must be reflected in your 15 year index and payment history.

Thank you very much for your quick response!!

Follow up to that...if a customer applied for a HELOC, and received his early disclosures, including the program disclosure, that shows a floor as "x"...then, the bank decides to raise the floor to "y"...can we approach the customer about the change in the program? And if he decides he is ok with the new floor, will he need to re-apply, or can we get a new program disclosure signed as evidence he agreed with the change? Or, are we better off not approaching this customer about the change at all? Thanks!

Yes you can approach and yes you should provide him with the new plan disclosure. If he does not accept the new terms then you have to refund all fees that's been paid in connection with the application, including any third party fees. IOWs the customer can back out at absolutely no cost to them.

See 226.5b(d)

A statement that, if a disclosed term changes (other than a change due to fluctuations in the index in a variable-rate plan) prior to opening the plan and the consumer therefore elects not to open the plan, the consumer may receive a refund of all fees paid in connection with the application.

My turn to follow-up on this topic.

Dan said that the floor would need to be reflected in the 15 year index and payment history. Would this apply even if we never had a floor before?

Yes. The historical example shows how the "current" plan's rates and payments would have been affected based on the index values for the last 15 years.

Thanks Dan.

My turn to pile on,
my bank wants to impose different floors based on the credit quality of the borrower. Problem is we won't know that quality and therefore the floor until after the underwriting process so we can't give specific disclosures to each borrower's floor.

Can we disclose for the highest floor rate and then at time of closing reflect the actual floor rate (which will be what we disclosed or lower)?

Bump

IMHO that would not meet the requirements of the regulation. Each floor constitutes a separate plan and the regulation requires that you have disclosures for each plan.

Adding to this older thread.....we have existing HELOC's with a floor. Loan officer wants to decrease the floor. HELOC has not matured. Are we able to decrease the floor with a modification and not have to do a new plan? The decrease in the floor is to the customer's benefit so I am assuming we could.

Thanks.

Yes, you may modify a current HELOC through a written signed modification without it being considered a new plan.

Thanks Randy!